A billion-dollar bet on Atlantic City

Boyd, MGM Mirage venture opens on time, on budget

WilliamSpain

ATLANTIC CITY (CBS.MW) -- The initial payback from a huge bet on the future of Atlantic City arrived early Thursday when the billion-dollar Borgata cracked open the decks for the first time.

A bold attempt to upmarket a downscale destination, the joint venture between Boyd Gaming
BYD, +2.19%
and MGM Mirage
MGG, +5.26%
is this city's first new casino in 13 years and is being touted as a little bit of Las Vegas on the Jersey Shore.

The impact on the city, on competitors -- and on Boyd's bottom line -- could be enormous. While the far larger MGM Mirage is the company best known for megaresorts like the Bellagio, Boyd is very much running this show. And for good reason: Just its half of the Borgata dwarfs all of its other properties.

With a projected $500 million a year coming in between the two, "it should be by far the largest producer of revenues and profits in the Boyd family," Chief Financial Officer Ellis Landau said not long before the opening.

It will also boost "our image and our visibility. The Borgata is an entity that brings us to a whole new level," he added.

Visibility they got. Far larger and more lavish than its nearby rivals, the Borgata boasts 2,002 rooms, 11 restaurants and bars, a spa, and 125,000 square feet of gambling space that includes more than 3,600 slot machines. And the technology is decidedly 21st century -- from the microchips in the uniforms to omnipresent plasma screens to slot machines that neither accept nor pay out in coin.

And imagewise the company is looking pretty good, helped along by the whole thing's having come in on time and on budget.

All those bells and whistles, put together at cost of $1.1 billion, are designed to attract a new kind of visitor to Atlantic City, people that MGM Mirage's chief executive, Terry Lanni, called "rejectors" during Thursday's opening festivities.

In a place where most players come in on day trips with a few buckets of quarters to spend, the Borgata is looking to rope in the kind of vacationers who might go to Mandalay Bay
MBG, -0.34%
but wouldn't be caught dead at a Showboat.

In other words, folks who want to play more than just a few games.

"This place is built for fun -- and it is critical to have a fun component built in to the new gaming properties," said Sterne Agee & Leach analyst Danny Davila. And once you have it, he said, "the young and hip crowd has never, ever failed to demonstrate its ability to come to places like this."

Certainly, the place was thronged by late morning on opening day, with parking lots full and shoulder-to-shoulder conditions. And if there were more wheelchairs than nose rings, that might be explained by the fact that rooms won't be available to the weekender crowd until later this month.

In a note to investors the morning after the first dice rolled, CIBC World Markets analyst William Schmitt said he thinks "early volume levels should be strong and that the property should be additive to the market, although its effectiveness at growing the market will be determined over time."

However, he continued, his view is that "Borgata has set a new standard for properties in Atlantic City."

Of course, while company executives and local politicians are making much of the potential for new customers, the Borgata also counts on snatching away business from existing properties.

"It is very attractive and will draw new visitors to Atlantic City," Landau said, "but we don't think [the profits] will all come from market growth."

Executives at nearby rivals, including Harrah's
HET
and Park Place
PPE, -40.00%
publicly welcome the new addition as a way to help expand the overall market while privately conceding that they are going to take a hit -- at least in the short term.

At the very least, the arrival of the Borgata will likely force its competitors to add amenities or be more generous with their "comps" (those freebies that casinos dole out based on the amount of money a patron is willing to risk).

When they do come, they won't be just popping by. Unlike many of the casinos that are clustered along the boardwalk within easy strolling distance of each other, the Borgata stands alone on a point. The only practical way to get here is by car, bus or taxi, which does limit accessibility a bit.

As Landau pointed out, "we won't be getting any walk-in business, but we won't have a lot of walk-out either."

Shares of Boyd have been on the rise in anticipation of the new cash flow the Borgata will generate. At $11 and change in March, it closed at $17.26, down 9 cents, in Thursday's abbreviated session.

It is still off its 52-week high of $19.20 last September, and the Street doesn't seem to expect much more upward momentum soon.

"Historically, we have seen most gaming stocks show strength coming into the opening of a new property," said Deutsche Bank analyst Marc Falcone. "Offsetting that is the risk that higher costs will impact the overall profitability, which is what investors will be more focused on."

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